CEO Chat: Chevron's Mike Wirth

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We're all dealing with this dual challenge of how do you meet the world's need for energy to keep the lights on, keep the trains running, and keep the economy going at the same time as we deal with the challenges of climate change.

Welcome to the Barron Streetwise Podcast. I'm Jack Howe. The voice you just heard, that's Mike Wirth. He's the CEO of Chevron. I spoke with Mike recently about the outlook for oil production and about how an oil company handles the growing shareholder push to take action on climate change. This episode is the third in a series of six quick chats I had in connection with the Top CEOs issue of Barron's Magazine. These episodes will be short, but we're doing two a week instead of our usual one. On to Chevron. It's been a little more than a year since we did an episode of this podcast called The Week Oil Got Weird. How weird did it get? The price of Texas crude went negative by $37 a barrel in futures trading because early in the pandemic, roads had emptied and at a small Oklahoma trading hub, the storage tanks had filled and no one wanted to take delivery of the stuff. That was a short-lived pricing fluke. Oil prices quickly went positive again, and now they're higher than they were before the pandemic. That's where I started the conversation with Mike. So we're all watching the oil price rise and, you know, on the one hand, maybe a good sign for recovering demand across the economy. And on the other hand, everyone's wondering, will oil companies be able to produce enough? How much higher is it going to go? What can you tell us about the ability across your industry to produce right now and meet demand?

Well, I think there's still plenty of supply that's available. You know, OPEC+ is holding back several million barrels a day of production that is expected to grow gradually return to markets and they've been returning production to markets. Inventories have been at very high levels globally. Those are coming down. And so we're seeing things move back into a more normal state of equilibrium. Uh, still some uncertainties out there in terms of how the pandemic response plan happens in other big economies. And I think at this point, the industry is in a good position to continue to meet demand over the balance of the year.

There's a meaningful cohort of investors out there that are taking aim at kind of the main thing that You do, right? And they want decarbonization and they've got some good momentum and they've got, you know, some investor fund flows and things like that behind them. So how do you balance that with your business? Are the demands that you're hearing reasonable in the context of how much oil and gas we might need going forward? And how do you strike that balance between what you have to do to meet societal demand and what these investors are demanding from you?

Our investors have been very clear. Most of our meetings now begin with a discussion of ESG. And that wasn't the case just a few years ago. So our big long-only investors care about these things and we care about them. You know, our challenge is to deliver higher returns and lower carbon. Our industry has been a tough one for a number of years here. And so we've got to improve returns on invested capital and we've got to reduce the carbon intensity of our operations. So, you know, every credible projection out there says the demand for oil and gas will be robust into the future. Even as at the same time we see renewables and other forms of energy continuing to grow very rapidly. And we're investing in reducing the carbon intensity of our own operations. We're bringing renewables and offsets into our business with renewable natural gas, renewable diesel fuel, sustainable aviation fuel, and helping customers decarbonize their business. Longer term, we're investing in things like hydrogen and carbon capture to further help address these challenges. And then finally, we're investing in the future through a number of different technologies, which may not be ready today, but maybe a big part of the energy system down the road. So advanced geothermal, we've invested in everything from mobility and autonomy and vehicles to advanced nuclear technologies. So this is what investors are focused on, and it's what we're focused on.

Can you tell me a little more about one or two of these technologies? Usually whenever I hear the word renewable, it's in connection with solar or wind, and you use it in connection with, you know, some, some different fossil fuels. What technologies are you looking at to make those things more renewable and satisfy the demands of your investors?

Well, I'll give you a couple of examples. Renewable natural gas is a product that we're now providing to the market where we work with non-traditional partners, in this case dairy farmers who have unabated methane emissions that go into the atmosphere from their farming operations. And we help—

I used to live in a cow town. I'm pretty sure I know what you mean.

You know, you know the aroma. We help to capture those emissions. Methane is a very potent greenhouse gas. Much more potent than CO2. And so if we can come in and help capture the methane that currently goes into the atmosphere, we can then treat it and clean it so that it meets a pipeline specification and then transport it to customers. It can displace fossil fuels. Another one is renewable diesel and sustainable aviation fuel, both of which we're investing to manufacture in our own facilities now using agricultural-based oils, seed oils, as the feedstock. So these are things that are small today, but they're growing and they help us reduce the carbon intensity of our operation in markets today where the policies encourage these things. I think in the future we'll see that grow even more broadly in terms of market demand.

And have you focused on these areas because you feel like you have some expertise there where if you were going into solar and wind, those are more crowded, or why those areas?

We are working on things that fit with our skills and capabilities and lines of business today. Uh, we've not gone into merchant solar and wind. We do use solar and wind to help support our own operations where that makes sense. But if you're talking about generating electricity to sell into the grid, there are really good developers out there that can do that. The technology is good and getting better. There's plenty of capital available for that. And so our company has looked at it and said, do we really add value here? Or can investors invest in them directly? Because we don't necessarily bring unique capability that would create value. And so we've not gone into those businesses. But I talked about hydrogen. Uh, we generate a lot of hydrogen today, have a lot of experience in hydrogen and looking for ways to reduce the carbon intensity of that. Same thing with carbon capture and storage, which is about managing those emissions, capturing them, and then sequestering them in geologic formations, which really plays to the strengths that we have in subsurface reservoir management, for instance.

Tell me about the competitive strengths that differentiate you from your peers? For an investor out there who's saying, hey, look, I think that there's better value in oil and gas than people realize right now. I want to lock in an investment for the long-term. What is it that sets your company apart?

Well, we've got a portfolio that is unique and very powerful. We have assets that have scale so that we can be competitive through the inevitable commodity price cycles for our business. The carbon intensity of our operations today is in the best quartile, the lowest carbon-emitting quartile in the industry. And we've got positions that are very long-lived that, that will support our business long into the future as opposed to being on a treadmill. And we've got attributes of how our company has been run with capital discipline, with cost discipline, with a focus on operational excellence, which means safety, environmental health protection of our workforce, of our communities. That is an absolute foundational value of our company. And we have to look out the window and serve markets as they exist today, even as we look down the road to help markets evolve to the future. And I think our company is uniquely positioned to do both of those.

The decisions that your peers make can affect you. What's your view right now on, you know, the industry as a whole in terms of where everyone's producing, the responsibility that your different peers have shown? What do you think of the backdrop right now?

Well, amongst the major companies that do what we do, the investor-owned companies, I think everybody is searching for their strategy for the future. The strategies are quite different, probably more different than I've ever seen, all trying to meet the needs of their shareholders and, uh, respond to society's expectations that we be part of addressing climate change. It's too big for any one company, any one country, or any one industry to solve alone. But I see our competitors all taking what they believe is the right path for their company. Some are going into wind and solar. And as I mentioned, that's really not the strategy that we've laid out. But we're all dealing with this dual challenge of how do you meet the world's need for energy to keep the lights on, keep the trains running, and keep the economy going at the same time as we deal with the challenges of climate change. And so I think investors will have choices as, as companies head on these pathways that are less similar than they have been in the past. But underlying it, the, the big competitors that we have in our sector of the economy are all trying to do the right thing. We can do it. We must do it. It's what our investors expect out of us. It starts with financial strength, which was clearly tested last year as oil prices collapsed and even went negative at one point. And ever cleaner energy is what we've always done from the beginning of time. We've met growing demand and we've reduced the environmental impact of, uh, of the consumption of energy in the economy.

You're going to change what I think about when I drive through those cow towns from now on. I'm going to say that smells like profitability in the air.

Smells like renewable natural gas, Jack.

Thank you for listening. Jackson Cantrell is our producer. Jackson, go ahead and sing us out.

Don't make me sing, Jack.

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H-O-U-G-H.

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Mm-hmm.